Unemployment in the UK has risen to 5.2%, the highest level in nearly five years, while wage growth continues to slow, raising the prospect of another cut to interest rates in the spring.

The Office for National Statistics (ONS) said the rate of unemployment was 5.2% in the three months to the end of December, the highest rate since the quarter to January 2021. This was in line with what economists had been expecting and was up from 5.1% in the three months to November.

Joblessness in the UK has steadily risen since 2022, and businesses have complained that tax rises by Rachel Reeves in her last two budgets have exacerbated this, with rises in national insurance contributions and the minimum wage causing particular issues.

In the three months to December, wages excluding bonuses in Great Britain increased by 4.2%, easing from 4.4% the previous month.

In the private sector, pay rose by 3.4%, the lowest level in five years, while wages in the public sector rose by 7.2%. Once adjusted for inflation, annual pay excluding bonuses rose by just 0.8% in October to December, the lowest rate since August 2023.

The number of people on company payrolls also continued to fall, down 134,000 on a year ago, and by 46,000 over the quarter. On a monthly basis, payrolls fell by 11,000 in January.

However, a sharp monthly decline reported in December compared with November was revised upwards by the ONS, from its original estimate of a fall of 43,000 to a fall of just 6,000.

Liz McKeown, the director of economic statistics at the ONS, said: “The number of workers on payroll fell further in the final quarter of the year, reflecting weak hiring activity, although it is largely unchanged in the latest month.

“Over the same period the unemployment rate increased, with data showing that more people who were out of work are now actively looking for a job.”

Peter Dixon, a senior economist at the National Institute of Economic and Social Research, said: “Below the surface, there are indications that younger workers in particular are being priced out of the market.

“A rise of 33% in the minimum wage over the past two years has pushed up the unemployment rate for 18- to 24-year-olds by more than two percentage points to 14%.”

That is also the highest rate in five years – or nearly 11 years excluding the pandemic – amid concerns that Britain is slipping down global league table for youth employment.

The figures suggest the Bank of England is likely to make another cut to interest rates by the spring, as inflationary pressures, such as higher wage growth, appear to be easing.

The Bank has forecast that the unemployment rate will rise to 5.3% this year and that wage growth will moderate from 3.4% last year to 3.25% by the end of the year as inflation falls. At the its recent meeting earlier this month, the Bank kept rates on hold at 3.75%.

Paul Dales, the chief UK economist at Capital Economics, said: “The lack of green shoots of recovery in the labour market and further fall in wage growth supports the idea that the Bank of England has at least a couple more interest rate cuts in its locker, with the chances of the next cut happening in March rather than April edging higher.”

Inflation – which measures the pace of price rises – hit 3.4% in December, up from 3.2% a month earlier. The ONS will release data for January on Wednesday.

Recent business surveys have suggested the jobs market is improving in January as companies renew their recruitment plans now that uncertainty around the budget in late November has lifted.

A report by KPMG and REC, the recruitment body, reported the smallest drop in permanent staff placements in 18 months, while a survey of chief financial officers by the Bank of England reported that firms expect to raise employment this year for the first time in five months.